James Gorman Is Begging Moody's Not To Downgrade Morgan Stanley

How do you get a rating agency to have some mercy on your bank? Hopefully for Morgan Stanley, James Gorman has the answer to that question.

The FT reports that the Wall Street CEO has been in talks with Moody's since earlier this year, trying to convince them not to downgrade his bank's credit rating.

Here's why the downgrade is such a big deal: As you know, Morgan Stanley shares ownership of Smith Barney with Citi. Morgan has a 51% stake in the brokerage firm, and Gorman has made it clear that his strategy is to own more of it.

At the end of May, Morgan Stanley has the option to increase its stake in Smith Barney to 65%. Gorman could also buy the bank outright, but according to the FT, that will depend on price — right now, the whole kit 'n kaboodle is valued around $10 billion.

Fine. But the thing is that Morgan Stanley might have to issue debt to raise cash for the purchase, and if the bank is downgraded, that whole process will become more expensive.

The bank could see its rating reduced by as many as three notches to Baa2 - two levels above junk status... A downgrade would also force Morgan Stanley to provide additional collateral to back its vast derivatives business, where it acts as a counterparty.

Sound bad, but if Gorman gets his way, there will be a ton of people on the Street calling him to learn how he did it.